Conflicting loyalties.

• Author: Broder, Peter
• Position: Feature: Charity Law

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The proclamation of the Canada Not-for-Profit Corporations Act (CNCA) last October marks a major updating of several aspects of governance for federal non-share corporations. It incorporates welcome refinements to existing law related to director liability and offers a statutory due diligence defence against alleged breaches of duty of care by directors. However, one area where the new statute isn't much help is in dealing with conflicts of loyalty.

Like its predecessor statute, the Canada Corporation Act (CCA), and equivalent legislation at the provincial level, the CNCA focuses on pecuniary conflicts of interest. While from time-to-time a director of a charity or not-for-profit organization may have a material interest in a contract or other business dealing in which the corporation is involved, it is probably more frequently the case with charities and not-for-profits that potential conflicts arise owing to a director or officer feeling or acting on a loyalty to a group other than the charity or not-for-profit corporation.

As with the CCA, under the CNCA a director is obliged to act in the best interests of the corporation. The courts have held that one element of a director's fiduciary duties is a duty of loyalty.

This includes:

* disclosing any dealings with the corporation and actively avoiding impropriety or dishonesty;

* giving full allegiance to the corporation's mission;

* resigning where personal prejudices or beliefs inconsistent with that mission might interfere with duties owed to the corporation;

* respecting confidentiality; and

* supporting execution of board decisions.

The ability to put one's personal and other interests aside when acting as a director is essential to being able to fulfil this duty.

Conflicts of loyalty usually arise where, in considering a matter, a member of a decision-making body owes a duty or is influenced by an affiliation with an entity for which the matter is being decided. An affiliation may be formal or informal.

Sometimes an apparent, rather than actual, conflict of loyalty will exist because the decision-maker owes a duty or has an affiliation to different groups, but the interests of the groups co-incide rather than diverge. In such a case, there may technically be no reason for directors to remove themselves from consideration of the matter. However, concern over public perceptions may cause organizations to insist that they do so.

The "best interest of the...